![]() A comparatively new method to calculate risk-adjusted performance is M 2 which is derived by Franco Modigliani and Leo Modigliani. A positive alpha implies that the fund manager adds value which is attributable to their skill in pooling superior assets into their portfolio. In an efficient market, the expected Jensen’s alpha should be zero. Thereafter two years, to appraise the fund managers’ skills in assets selection, Jensen proposes a model to calculate alpha (popularly called Jensen’s alpha) which evaluates the additional return that the fund produces after adjusting for its systematic risk. However, for completely diversified portfolio, the two measures give the identical ranking for an entirely diversified portfolio as the total risk and systematic risk of a fully diversified portfolio are same. This ratio is close to Treynor ratio and employs beta as the measure of risk, whereas the Sharp ratio utilizes standard deviation to quantify risk. Another approach to calculate fund’s return over and above of risk free return for per unit of total risk measured by standard deviation is called Sharp ratio developed by William Sharpe. Treynor ratio calculates excess returns of fund for per unit of systematic risk measured by beta. Treynor was the first to address this issue and provide a way to measure the funds’ risk-adjusted performance. Although since 1960s investors have knowledge about quantifying and measuring risk with respect to variability of returns, no single tool essentially considered risk and return simultaneously. In spite of having the importance of risks, very few investors would consider risks in their analysis. They just average the funds’ returns over a number of periods and then rank them according to their highest returns. Prior to 1965 the performance of a mutual fund were measured by comparing with other funds’ average returns. Investors seek this information to facilitate their investment decisions appropriately while fund managers do this to evaluate their own performance in order to realize their flaw. Are mutual funds are generating returns greater than market average? Here the performance of mutual fund is always concerned for both the investors and fund managers alike. Now the question is whether the funds mangers are utilizing the investors’ money efficiently or not. Now a day, mutual fund managers are offering investors with much wider customized funds to deal with their various investments needs. In contrast, someone may necessitate fixed income to make payment of a loan. Suppose, someone has funds, but may not have enough time, expertise and even resources to undertake such large diversification while a mutual fund can do. Formerly, it was assumed that investment diversification was the foremost attraction of mutual funds, but now the purposes of mutual funds extended widely. Nonetheless, the term ‘mutual fund’ can be defined as one variety of investment vehicles that collects funds from various investors and professionally invests the same in diversified assets like stocks, bonds, money market securities or other assets to facilitate forming portfolio. The concept was first used in Netherlands in 1774, but the modern day mutual funds came into existence in 1924, thereafter it tended to obtain popularity. Mutual funds have evolved over many years and have become an imperative tool to investors, especially small ones. Thus, with a little exception, we can conclude that fund managers have no ability to outguess the market in Bangladesh. On the other hand, we have employed two popular methodologies Treynor and Mazuy and Henriksson and Merton to test the market timing skill of fund managers and found no market timing skill persistent to the fund managers. In addition, the negative values of alpha indicate that fund managers become not only failed to add value to their portfolio, but also pool wrong assets which hurt the return resulting negative profit. We have used six measures average return, Sharpe ratio, Treynor ratio, Information ratio, Jensen’s alpha and M square to confirm the selection skill of fund managers and found no selection skill persistent to most of the fund managers (excluding Aims 1st M.F, ICB AMCL 2nd NRB M.F. To serve our objective, we tested both selection and market timing skills of the fund managers. We perform the investigation on weekly data of 25 mutual funds for the period of to April 28, 2016. This study principally analyzes the fund managers’ ability to outguess the market in Bangladesh.
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